Economies around the world have suffered from the events of the past three years. The Covid-19 pandemic has claimed millions of lives and brought the global economy to a standstill. Russia’s brutal war has not only wreaked havoc in Ukraine, battered human and material, but also the global economy, driving up energy and food prices.
The global economy was just beginning to regain its footing. Hovering over these crises is climate change. Severe droughts and floods are affecting agricultural capacity and have exacerbated energy shortages around the world.
These dislocations have led to severe shortages and skyrocketing prices of essential commodities ranging from lumber to microprocessors to energy sources. This, in turn, has slowed global growth.
Over the past year, President Joe Biden’s administration has embarked on a historic economic plan to build American resilience. We have built port capacity, reviewed supply chains and committed to historic investments in our physical infrastructure. And we passed legislation that will expand domestic manufacturing capacity in key sectors like semiconductors and clean energy.
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But I believe that the success of our plan also depends on our foreign trade policy. The traditional notion of free trade emphasizes the efficiency of trade determined by comparative cost advantages. This is the economic theory that suggests that every economy should produce what it is comparatively best at.
The comparative cost advantages explain the efficiency gains through international trade and specialization. But we have learned that we also have to take the reliability of trade into account.
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I am convinced that any economic agenda in today’s world must consider the potential impact of regional and global shocks on our supply chains; this includes shocks caused by the policies of certain foreign governments.
We are concerned about increasing geopolitical and security risks, as well as human rights violations. Through an approach known as “friendshoring,” the US government aims to preserve the efficiencies that trade brings while promoting the economic resilience of the US and its partners.
We must vigorously protect global economic integration. To do this, we need secure trade that reaps the benefits of economic integration while ensuring greater reliability in the supply of the goods we depend on.
The following risks must be minimized:
1. Eliminate over-concentrations:
The USA and its partners have a strong interest in securing their supply chains. We must avoid any over-concentration of production of critical goods in any given market. Concentrating sources of key components can sometimes lead to cost reductions. But it leaves supply chains vulnerable to domino effects that hurt workers and consumers.
Let’s take semiconductors as an example. Microchips are essential building blocks of the modern economy. But practically all the production of the most modern chips is in East Asia.
We’ve seen first-hand the aftermath of a shortage that’s been estimated to have affected at least 169 industries. In the automotive industry alone, the cost of the 2021 pandemic-related chip shortage is an estimated $210 billion in lost sales. Manufacturers such as Ford and General Motors were forced to temporarily close several of their plants.
Concentration risks can manifest themselves particularly acutely during a crisis. Such events produce sudden supply or demand shocks; they can also cause countries to turn inward.
Before the pandemic, the US imported almost half of its personal protective equipment from China. When global demand suddenly increased in early 2020, that concentration led to the drastic shortage of personal protective equipment for American workers who worked with other people.
We must never again allow our medical staff to resort to garbage bags as protective equipment in the event of a public health emergency. And that requires a transformation of our supply chains.
2. Hedging against geopolitical risks
Second, we need to hedge against geopolitical and security risks. Not only is Russia currently waging a brutal war against the Ukrainian people; it also uses commodity exports as a weapon against the world. For too long, large parts of the world have been willing to believe Russia’s claim that it is a reliable supplier and cheap and practical source of energy.
The consequences are clear. In the first five months since Russia invaded Ukraine, the price of natural gas in Europe has soared 170 percent. Russia’s demolition of granaries and its blockade of Ukrainian ports have pushed up food costs. The World Food Program estimates that Russia’s war could leave up to 70 million more people in acute food insecurity.
3. Human rights matter
Third, we must move away from supply chains that violate core human rights. The US has banned the import of goods manufactured using forced labor for years.
A particularly problematic area is imports from China’s Xinjiang region, where the Chinese government has committed human rights abuses against Uyghurs and other ethnic and religious minorities. It has forced the inmates of its detention centers into forced labor through threats of violence, physical and sexual abuse and torture. The Biden administration restricts imports of goods manufactured in Xinjiang using forced labor, including cotton, tomatoes and certain silicon-based products.
Supply chain risks are a matter of great concern. The first thing we need to realize is that the private sector does not internalize the right level of economic resilience on its own. Some companies have strong incentives to focus on short-term cost reductions and may not address the longer-term risks of over-concentration in supply chains.
4. Friendshoring: promoting trade among partners
The Biden administration’s friendshoring approach aims to deepen our economic integration with a large number of trusted trading partners. And he seeks to build redundancies into supply chains to reduce risks to our economies.
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We believe it is important to move away from a trade that only chases the cheapest supply chains without considering other factors such as concentration, geopolitical and security and human rights risks.
Friendshoring is a reply to those who argue that economic security can only be achieved through protectionism. Friendshoring aims to simultaneously achieve economic resilience and realize the economic efficiencies emanating from trade.
We don’t strive to produce everything ourselves. Nor do we seek to limit trade to a small group of countries. This would significantly reduce the efficiency gains from trade and hurt US competitiveness and innovation. Rather, our main goal is to diversify away from risky countries and concentrated supply chains.
The Biden administration is pursuing its friendshoring agenda through a wide range of bilateral and multilateral efforts. In the US-EU Trade and Technology Council, we work together to build secure supply chains in the solar, semiconductor and rare earth magnets sectors.
In the Indo-Pacific, the US is developing similar partnerships through the Indo-Pacific Economic Framework (IPEF) and in Latin America through the Americas Partnership for Economic Prosperity.
Of course, in every discussion about friendshoring, the question arises: Who are our friends?
Friendshoring is not aimed at a self-contained group of countries. It is open oriented and includes our partners in emerging markets and developing countries in addition to the advanced economies. In fact, a central part of our agenda is to deepen the integration of the US and our partners with developing countries.
Friendshoring will be implemented gradually. But the development of new supply chains is progressing. For example, the European Union is working with Intel to support an investment of almost $90 billion to build a regional semiconductor supply chain over the next decade.
The US is also doing its part: we are working with our trusted partners to develop a complete semiconductor ecosystem here in the US.
We are also working with Australia to establish rare earth mining and processing facilities in both our countries. China traditionally holds a dominant market share in the production of magnets and rare earth elements, which are important components of consumer electronics, clean energy generation capabilities and military technologies.
5. Strengthen climate protection
In the United States, we recently implemented our country’s most aggressive climate action to date, putting us on a promising path toward meeting our emissions targets. We will also continue to help developing countries move more decisively towards a more resilient, lower-carbon future.
Beyond the impact on climate, our collective shift away from fossil fuels will also reduce our vulnerability to oil and gas price shocks and our reliance on autocratic regimes that often control much of the world’s fossil fuel supply.
In pursuing these initiatives, we will continue to focus on friendshoring for sectors and products that are central to our national and economic security. We will agree with our trading partners on high standards for human rights, workers and the environment. And we will continue to support trade integration, which has brought significant benefits to the global economy.
I am convinced that looking back over a few decades, the last three years will appear to us as a uniquely volatile phase in our modern history, shaped by pandemics, war and natural disasters. But I also believe that this phase will be seen as a moment when the US and its partners advanced a new pillar of their economic agenda that focuses on resilience.
The author: Janet L. Yellen has been Secretary of the Treasury in Joe Biden’s cabinet since January 2021. From 2014 to 2018, the renowned economist was President of the Federal Reserve Board.
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